Why Nifty/Sensex is not the correct barometer to compare portfolio performance?

Last week, I met one of my friends who asked me an interesting question, “Why is it that Nifty and Sensex were up 25% in the year 2012 but I have lost money in my portfolio?” Many times I hear people say Nifty is up 13% year to date or Sensex is up 12% but what does it mean to your portfolio?

CNX Nifty or Nifty 50 is an index of 50 stocks whereas S&P BSE Sensex is an index of only 30 stocks. The criteria for the constitution of this index is set in such a way that only companies with a large market capitalization can enter these indices. Other factors which are more important like business sustainability, profitability, growth, management have not been considered. So this would include a possibility that “Hot sector companies” might find the place in the index whereas a well managed, dividend paying company might not be included. The criterion of selecting the index constituents shifts the bias towards large market capitalization companies and the index is not well represented. For eg: ITC has a weightage of 10.68% in BSE Sensex currently but you might not have it in your portfolio considering the valuations that it is trading at. If today ITC moves up by 5%, then the index would move up just by its weightage in ITC but your portfolio return could actually be negative. After my friend’s comments, I decided to do some data mining as to the comparison between index returns and overall market capitalization of all the listed companies.

	NIFTY	BSE SENSEX	OVERALL MARKET CAP
01/01/2007	4000	13827	$1.8 trillion
30/10/2013	5780	19525	$1 trillion
Return	44.50%	41.20%	-44.44%
01/01/2010	5200	17473	$1.6 trillion
30/10/2013	5780	19525	$1 trillion
Return	11.15%	11.70%	-37.50%

 Note: The data in the above table is approximate data and might not be accurate

As you can see in the data, there is huge discrepancy in the index returns and the overall market capitalization of all listed companies. Index returns might be skewed by a few stocks such as ITC, Reliance, HDFC and HDFC Bank. Hence Nifty/Sensex might be a very concentrated portfolio of stocks and might not be a true barometer for comparing your portfolio returns.

By -  PPFAS